Hutchison, 67, sent a letter to supporters Thursday stating, "I am announcing today that I will not be a candidate for re-election in 2012."
"I thought now is the right time," she said in a television interview later Thursday.
Hutchison said she wants to be in Dallas to raise her 9-year-old children in Texas.
"Well, my children need a mother, and a commuting mother is not the best situation if you can avoid it," she said.
The moderate Republican said she plans to focus on the U.S. budget, as well as Texas during the remainder of her term.
"I want to be a major part of getting the budget down, cutting spending, getting down the debt that this country has really taken in the last two years," she said. "I am a budget-cutter, and I want to prioritize our spending, spend our money wisely, but we've got to cut the budget."
Hutchison also said she plans to focus on local efforts such as the Trinity River project and on protecting the Bush tax cuts.
"The Trinity River is very important to Fort Worth development, to Dallas development," she said. "It's a water project, it's a flood-control project, and I have been a champion along with congresswoman Kay Granger from Fort Worth, and I'm going to finish that job."
Hutchison, who has two years left in her term, said she decided to make the announcement now so that others have time to decide if they want to run for her seat.
Hutchison, the first woman elected to the U.S. Senate from Texas, challenged Gov. Rick Perry in the 2010 Republican governor's primary.
At the time, she said she would resign her seat in the Senate. But she later changed her mind, stating, "I intended to leave this office long before now, but I was persuaded to continue in order to avoid disadvantage to our state."
In the letter to supporters Thursday, Hutchison also said that "the last two years have been particularly difficult, especially for my family, but I felt it would be wrong to leave the Senate during such a critical period." (Read the complete letter to supporters here.)
In the television interview, she also said she plans to be active in the 2012 presidential campaign -- as a volunteer, not a candidate. Hutchison also said she plans to protect her Republican seat.
"I want to make sure that we have a fighter for Texas in the Senate, and that's what I've been, and that would be my legacy."
At the end of her term, Hutchison will have served 19 years in the U.S. Senate.
The former television reporter and University of Texas cheerleader was first elected to the Senate in 1993 in a special election to replace Sen. Lloyd Bentsen, who resigned to serve as President Bill Clinton's treasury secretary. She was elected to a full term in 1994 and comfortably won reelection in 2000 and 2006.
Hutchison's career in Texas politics stretches back more than 30 years, beginning when she was elected as a state representative in 1972. It was while serving in the Texas statehouse that she met her husband, Ray Hutchison, a successful bond lawyer.
Growing up in the Houston suburb of La Marque, she had hoped for a legal career, but after being turned down by large law firms because of her gender, she shifted first to journalism and then to banking before building a successful career in politics. After serving two terms as a state representative, Hutchison was appointed to the National Transportation Safety Board in 1976. She lost a race for the U.S. House in 1982, then left politics for work in the banking industry.
She returned in 1990, winning a race to become the state treasurer. She parlayed that into a victory in the 1993 special election, before winning reelection. In 1994, she was indicted on charges of official misconduct and record tampering from when she served as state treasurer. Travis County prosecutor Ronnie Earle, who would later bring charges against former U.S. House Majority Leader Tom DeLay, dropped the case midway through Hutchison's trial, and she was acquitted.
In the Senate, Hutchison helped devise federal welfare funding formulas for Texas and other high-growth states, worked on defense policy issues as a member of the Appropriations subcommittee on defense and military construction and, after the Sept. 11, 2001, terrorist attacks, led an effort to convert airport security screeners into federal workers.
"It was my legislation that eliminated the marriage penalty for most couples," she said. "It was my legislation that produced homemaker IRAs, and it my legislation that gave Texas residents sales tax deductions when we didn't have that before I came to Congress."
Republicans and Democrats both expect a competitive race to replace Hutchison.
Republican Lt. Gov. David Dewhurst has expressed interest in Hutchison's Senate seat.
"I fully intend to explore running for the United States Senate, and should I run, I will run with the intention of winning and continuing to serve the people of Texas just as I have done throughout my career," Dewhurst said in a written statement.
Dewhurst, a wealthy Houston businessman, presides over the state Senate as lieutenant governor.
Other Republican contenders could include Dallas Mayor Tom Leppert, Railroad commissioners Elizabeth Ames Jones and Michael Williams, and former Secretary of State Roger Williams.
On the Democratic side, former congressman and current U.S. Trade Rep. Ron Kirk is a potential contender.
Former Houston Mayor Bill White, who lost a gubernatorial race to Perry in 2010, told the Houston Chronicle on Thursday that was not interesting in running.
NBC DFW's Jane McGarry contributed to this report.